India Markets closed

Solve The Indo-American Food Fight And Save The WTO Farm

The Smarter way to get your business news - Subscribe to BloombergQuint on WhatsApp

Born on Jan. 1, 1995, the World Trade Organization was the harvest of 50 years of cultivating a multilateral institution to promote free and fair trade. India toiled, with its delegate, S Ranganathan, signing the General Agreement on Tariffs and Trade (GATT) on October 30, 1947. But, an Indo-American food fight raging since November 2012 threatens to choke the life from the WTO at its biennial Ministerial Conference meeting on Dec. 10-13 in Buenos Aires.

On India’s side are the Group of 33 developing countries. America’s allies include the European Union. To be sure, in Buenos Aires, the 164 WTO members will argue about several topics. But, no Conference issue is more important than food. It’s the one good all 7.8 billion people need. It’s the one good in which every country hopes to be self-sufficient, but can’t. It’s the one good that is both a human right and essential to national security. If the WTO cannot solve the 5-year long food fight, then what good is it?

The Harvest That Sowed The Food Fight

Grown in the 1986-94 Uruguay Round, the WTO Agreement on Agriculture was a harvest unprecedented in international legal history. It was and remains the first multilateral deal establishing cuts on domestic support for farm goods and farmers. Alas, the seeds of the food fight are from this harvest.

The Ag Agreement (Article 6) puts farm subsidies into one of two categories, or ‘Boxes’ the Amber Box, which distort trade patterns, or the Green Box, which have no or minimal effects on output, imports, or exports, and are not price support for farmers (Ag Agreement, Annex 2, Paragraph 1).

So, suppose the Indian government pays a wheat farmer in Punjab Rs 100 for every bushel of wheat she harvests. That’s a textbook Amber Box subsidy. It creates an incentive to keep producing, possibly export the wheat, and even dump it on the world market, which might cause price suppression or depression. So, India should decouple the subsidy from her yields, and Green Box it by using non-trade distorting metrics such as conserving water, or a flat Rs 100 income.

Daily wage laborers stack sacks of grain at a warehouse in Faridkot, India (Photographer: Sanjit Das/Bloomberg News)

During the Uruguay Round, many countries pre-emptively agreed to limit (under Ag Agreement, Article 6:1) their Amber Box spending, and cut expenditures from these ‘bindings’. The United States did so at $19.1 billion, and its Amber Box support drifted down to around $7 billion.

For developing countries like India, with no self-imposed Amber Box ceilings, expenditures must not exceed 10 percent of the total value of their annual domestic agricultural output.

That’s the so-called de minimis cap.

The aim is to plough down Amber Box and non-de minimis subsidies, and replant subsidies in the Green Box.

So, expenditures above Amber Box or de minimis limits expose a WTO Member to a lawsuit (under Ag Agreement, Articles 6:3 or 7:2(b)). By Green Boxing farm subsidies, a member need not count them as expenditures subject to Amber Box reductions, nor include them in its de minimis calculation.

Staying in the Green Box guarantees immunity from prosecution.

South Korean trade unionists scuffle with riot police and are hit with pepper spray during protests against the WTO’s Sixth Ministerial Conference in Hong Kong, China, December 14, 2005. (Photographer: Michael Caronna/Bloomberg News )

Green Box Food Stockpiles

Over 60 million Indians have died in 18th, 19th, and 20th century famines. Logically, as India Green Boxes its subsidies, it seeks to address food insecurity using space in this Box called “public stockholding for food security purposes.”

Four sensible criteria define this space (Ag Agreement, Annex 2, Paragraph 3):

  • Purpose: Accumulation and storage of grains must be for food security.
  • Targets: Purchase and storage operations must be based on pre-set targets. Otherwise, a government could intervene in its domestic market against cheaper imported grains from overseas.
  • Transparency: Stockpiling must be transparent. Rules are clear and published.
  • Market Pricing: The government buys grains at current market prices and sells them at current domestic prices. If a government buys grains at above-market prices, then it is subsidising farmers. If it sells grains at below-market prices, it is subsidising consumers, and undercutting imports.

Notwithstanding the fourth criteria, what if a government buys and sells grains at ‘administered prices’, not in line with market prices?

That’s what happens in India.

One Seed Of The Food Fight: Does India Operate Outside The Green Box?

Established in January 1965 under the Food Corporations Act 1964, the state-owned Food Corporation of India buys rice and wheat at guaranteed high prices, and sells these grains at lower prices through ‘fair price’ stores. FCI absorbs the price difference. The government sets ‘administered prices’ and guarantees them to farmers. Moreover, under the Food Security Act, which the Lok Sabha passed in September 2013, food is a legal right. Roughly 800 million (the poor among India’s 1.3 billion people) are able to buy 5 kilograms monthly of rice and wheat at a subsidised price.

FCI’s off-market buy-sell prices are not okay if:

  • FCI’s administered acquisition price paid to farmers, exceeds
  • an ‘External Reference Price’, namely, a benchmark that prevailed in 1986-1988 (the first three years of the Uruguay Round).

Any positive difference is a ‘subsidy’. (See Ag Agreement, Annex 2, footnote 6.)

India must cut that subsidy if it pushes above India’s de minimis level. Otherwise, India could be sued.

The U.S. says India is way above. India budgeted $19 billion in the marketing year 2014-2015 for FCI purchases. That figure evidences India’s excessive subsidisation because it’s more than double what India needs for cash assistance to move households out of poverty.

So, the seed of the food fight is India’s use of administered rather than market prices, compared to the External Reference Price (ERP). Since 1986-88, commodity prices generally rose. India is stuck with an ERP that never has been revised upwards.

FCI is forced to acquire grains at higher prices against a fixed ERP. 

India might be over its de minimis level, rendering it liable for spending beyond the immunised Green Box.

5 Years Of Slinging Food

In November 2012, the G-33, led by India and Indonesia, called for an upward revision in the ERP to enhance their food security while avoiding a lawsuit.

America, plus the EU and Australia, opposed. They said price supports must not be replanted in the Green Box. Increasing the ERP would fertilise developing country schemes to subsidise their farm sectors.

Worryingly, China was emerging as the world’s largest farm subsidiser.

The U.S. countered with an offer of country-specific flexibilities upon request, for buying, storing, and distributing low-cost food for the poor. India said no case-by-case deals.

Norway planted a vague proposal in July 2013 for developing countries to adjust downward their administered prices if their agricultural markets functioned improperly, and thereby stay inside the Green Box. India killed it because, technically, FCI pays administered prices not directly to farmers, but to middlemen, called aggregators. They buy goods from farmers. FCI doesn’t know if there’s a spread in aggregator–farmer transactions, and if so, what it is.

In October 2013, India and the Philippines planted a proposal whereby any developing country with an inflation rate of 5 percent could adjust how it calculates subsidies. The U.S., along with Australia, Canada, and the EU, killed it. Inflation-adjusted Green Box spending would be carte blanche for developing countries, because so many have inflation rates over 5 percent.

Finally, at the December 2013 Bali Ministerial Conference, WTO members reached consensus on a ‘Peace Clause’, with a Decision. Embodied in Paragraph 2 of the Decision on Public Stockholding for Food Security Purposes, the Clause bars legal action against food stockpiling programmes.

The Peace Clause brought no peace.

Day 4 of the WTO”s Ministerial Conference, Bali, on December 3, 2013. (Photograph: WTO)

America said the Clause is restricted to 4 years of immunity, until the Ministerial Conference about to take place in Buenos Aires. India said the lawsuit ban lasts until members adopt a deal on the ERP and related reforms.

Based on the text of the Clause (which, in Paragraph 1, refers expressly to the upcoming 11th Ministerial Conference), the Americans had the better argument. India fought back.

In November 2014, India blocked adoption of the Trade Facilitation Agreement, an unrelated bargain to cut red tape in customs clearance, until members agreed to a new Decision that extended the Peace Clause indefinitely. They did: no lawsuits on public food stockpiling until a permanent solution is reached.

This Indian victory proved Pyrrhic.

In July 2017, the EU, joined by Brazil, Colombia, Peru, and Paraguay, planted a tough proposal whereby they linked public stockholding reform to a Doha Round deal on all farm subsidies. India, joined by Indonesia and many African members, called it a weed. They were mum about a joint proposal from Russia and Paraguay that dropped that linkage and strengthened the Peace Clause subject to transparency and compliance requirements.

In the meantime, America backtracked on its 2012 offer for tailored flexibilities.

Now, the U.S. is blocking any reference in a Buenos Aires Ministerial Declaration to the ‘importance of development’. That’s a challenge to the principle of special and differential treatment, which GATT enshrined in 1965.

The Other Seed Of The Food Fight

Each side characterises the fight differently. Unable to empathise, each negotiates from a different premise.

For India, the fight is about food security. It’s life or death. For America, it’s about transparency and preventing cheating. It’s just another commercial matter.

To India, America is hypocritical.

Since the Great Depression in the U.S., dust-bowl era 1933 Agricultural Adjustment Assistance Act, food security for Americans counts among the policy goals of America’s 5-year farm bills. Ditto for the EU’s Common Agricultural Policy. Though 14 percent of Americans are on food stamps — technically called the Supplemental Nutritional Assistance Program (SNAP) — never in its history has it had to cope with famines. Besides, America spends $71 billion annually, as of 2016, on SNAP.

So, America must realise Mahatma Gandhi’s truth, which India’s then Minister of Commerce, Anand Sharma, reiterated at the Bali Conference.

Anand Sharma, India’s Then Commerce MinisterThere are people in the world so hungry that God cannot appear to them except in the form of bread.

To America, India is in denial.

India’s food insecurity is thanks to its decrepit storage warehouses in which rats munch grain and its decaying transportation network across which food deliveries are delayed or lost. India should be transparent about the true causes of its woes.

Sacks of wheat sit under tarps while being stored in the open at the site of a Food Corporation of India grain warehouse in Sonepat, Haryana, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

India also should fess up to the fact it suffers not from food deficits, but from managing surplus production generated by excessive FCI purchases. India has 80 million metric tons of rice and wheat in reserve, as of September 2013, straining its storage capacity and fertilising fears of dumping.

FCI purchases soared from $5.5 billion in 2003-2004 to $14 billion in 2012-2013, and averaged $14.6 billion annually in 2011-2014.

But, India must realise the truth these expenditures did not all qualify for the Green Box. A September 2011 report by DTB Associates (a Washington, D.C. agricultural consultant) says India exceeds its de minimis cap by between 3.5 and 5 times.

Solving The Food Fight

Some empathy, plus five technical reforms, can end the food fight.

  • First, agree on a reasonable revision to the ERP, a midpoint between low and high commodity prices since 1986-88. No WTO member should be condemned forever by a 30-year old benchmark.
  • Second, agree to revise the ERP periodically, every 6 years to correspond with a Ministerial Conference. That will avoid future food fights.
  • Third, agree on transparency rules public food stockpiling. No member should be allowed to spend billions on grains, yet block the sun from other members seeing if those expenditures distort world trade.
  • Fourth, agree on graded sanctions for failing to report reliable food stockpiling programme data in a timely fashion. A rule without a remedy is just a suggestion.
  • Fifth, help India with its infrastructure, through separate, bilateral deals. America investing even a third of the $100 billion China has committed to Pakistan would fertilise the label America planted last month — Indo-Pacific region.

If the WTO can’t help members eat, then the multilateral farm is bankrupt.

Raj Bhala is Associate Dean for International and Comparative Law and is the inaugural Leo S. Brenneisen Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or the University, or Dentons or any of its clients, and do not constitute legal advice.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.

The Smarter way to get your business news - Subscribe to BloombergQuint on WhatsApp

. Read more on Opinion by BloombergQuint.